VOTE NOW!! Budget Cuts

[harnett]

In the face of the current crisis in the world economy, the majority of the world's countries are implementing significant budget cuts.  Many (Kenyesian orientated) economists question the stringency of these cuts, highlighting the negative impact on growth.  Others (monetarist orientated) claim that this policy is the only way to safeguard long term growth, fending off inflationary pressures. 

Getting the balance right is possibly the most important economic question of our time.

Here are some articles to help you decide:

http://www.imf.org/external/np/ms/2011/060611.htm?intcmp=239  (IMF Report on UK June 2011)
http://www.nytimes.com/2011/05/23/opinion/23krugman.html?_r=1&ref=paulkrugman (Krugman in NYT)

[Napodano]

Chosing an option depends from the country you are in.

I am in Italy and I voted 'Yes' because without budget cuts Italy would go belly up due to its bulging debt. I voted 'mostly' because I do not like the policy of 'linear', across-the-board cuts adopted by the Italian MoF. That is for me 'deciding not to decide' and reduce the effectiveness of the budget cuts as they are not based on spending reviews.

[harnett]

Well I can't have the "cuts mongerers" out in the lead from the beginning.  I'm in UK and the debate has really been hotting up with yet another reduction in growth predictions from the IMF and criticism of adhering to cuts coming from not only the left but former members of the governnment's treasury team!  Jonathan Portes, the director of the National Institute of Economic and Social Research, who until February was chief economist at the Cabinet Office, advising the prime minister, said: "You do not gain credibility by sticking to a strategy that isn't working."

We have the most austere cuts in Europe (apart from Ireland and Greece), but more room to manouevre than most.

[STONE]

I'm in France - it's spend spend spend - but will we know how it is to be financed and by whom and when?

On Portes - If I was working for the Cabinet Office, I'd toe the line or leave - if I left to direct NIESR and NIESR forecasters were suggesting current policy mix is not the "best" (sense to be defined) then it's a perhaps a case of: "when the (employment) facts change - I change my mind" - good 'Keynesian' stuff.   Same holds true for the of the ex-MPC lot.  I'm with cut what you can when you can; protect what you shouldn't cut.  We know that stability is important especially for the poor in the short term but there is a trade-off - who is writing down their social welfare function so we can see if it has a balanced response to VFM components within the current electoral cycle?

No help I'm afraid - just fence sitting.

[harnett]

On Portes - if you are in the Cabinet Office you are politically compromised - if Director of an Institute then you can say what you think!!!

[petagny]

It's a close call, but my vote is that the fiscal consolidation is going to be too deep and too fast (in reality, it's only just beginning).

It's not a classic Keynesian problem because there are also some deep-seated structural problems that need to be solved in the medium- to long-term, including the fiscal implications of an aging population. And this is not the kind of recession that represents a blip on a long-run upward growth trend: we are not going to return to the previous trend growth rate (which anyway was probably an illusion), so belt tightening is inevitable at some point.

Issues are being muddled in the debate as well. As Stone indicates, if there are efficiency savings to be made these should be made anyway, irrespective of whether there is a need to rein in the deficit. Changing the mix of outputs to get a better outcomes should also be ongoing irrespective of the fiscals stance (see recent discussions on the 'War on Drugs' for example)  Wasting money is not really a sensible way to sustain demand! This is different from changing service output and quality in order to make savings.

The Government is still able to borrow at 2-4% depending on the term and the private sector is saving like mad. Monetary policy seems to be rather ineffective. These seem like the conditions for a Keynesian demand-side boost. Probably national insurance was increased too soon and VAT should not have been pushed up to 20% at the beginning of this year (there is evidence that the previous small cut in VAT did have a significant stimulus effect). Is there any evidence that the markets were really ready to punish the UK for not adopting a very restrictive fiscal policy? Not much, I would say.

In reality, the squeeze on expenditure might turn out to be somewhat less severe than at first planned as the political dimension plays out. Look for example at the current discussion surrounding the plans for cutting Justice Department expenditures by 25%. Gaffs aside, Ken Clarke is trying to be innovative, but coming up against the law-and-order camp of his party.

[harnett]

Well thank you all who voted.  As is to be expected amongst economists, no consensus apparent from the voting or the comments so as a final word on the subject I'll point you towards an IMF staff position note which "review(s) the main elements of the pre-crisis consensus, we identify where we were wrong and what tenets of the pre-crisis framework still hold, and take a tentative first pass at the contours of a new macroeconomic policy framework." Enjoy.

[petagny]

I expressed an opinion, but I forgot to press the voting button! More (subconscious) fence-sitting!

Anyway here's a quote from today's FT on the degree of masochism involved in the UK fiscal adjustment:
 
'Voluntary austerity was the plan. Voluntary because bond markets did not indicate any problem in financing the deficit, and austerity because in the £128bn ($208bn) plan, equivalent to 7 per cent of annual national income, British households would be made to pay additional taxes or lose public spending on a scale that rose rapidly to an average of £5,000 a year by 2015-16.

Except during demobilisation from a world war, no British government had ever tried such radical surgery to the state. No other country in the world is willingly embarking on something so ambitious. One year on, everyone is watching to see whether it is working. Crisis-stricken nations such as Greece are being forced by circumstance into even greater austerity measures, but the Conservative Mr Osborne and his Liberal Democrat allies chose pain as the “foundation for a more prosperous future”.'

Perhaps 'masochism' is the wrong word, since those making the policies will not be feeling the pain (except at the ballot box in 4 years).